Thanks to higher commodity prices and increased production, Chevron flipped to earnings of $1.5 billion during the second quarter from a loss of $1.5 billion last year. Earnings would have been higher were it not for a noncash $430 million impairment charge. The robust production growth during the quarter, 10% from last year, shows Chevron is beginning to reap the large-scale investment it's made over the past five years. Guidance of 4%-9% production growth for the full year is unchanged, as are our fair value estimate and moat rating.

We see this growth, combined with reduction in capital spending, as leading to an inflexion in free cash flow and reduction in its break-even levels to $45/barrel. Both should be among the best of its peers. Chevron’s long-term outlook also remains bright, as it can continue to drive capital-efficient high-margin growth from its large Permian position. To date, production from the Permian has risen to 178 thousand barrels of oil equivalent per day from 44 mboed last year surpassing expectations, while cost reductions continue to increase the value of its existing acreage. The growth opportunity Chevron holds in the Permian sets it apart from peers. We think Chevron remains the most competitively positioned integrated with the greatest growth opportunities in the new lower-oil-price environment. That said, we don’t currently see the valuation as attractive.

Upstream earnings increased to $853 million from a loss of $2.5 billion last year on higher production and commodity prices and reduced impairment charges. Production surged to 2.78 million barrels of oil equivalent per day from 2.53 mmboed last year on new major capital project startups, higher Permian production, and less maintenance downtime. Downstream earnings slipped to $1.2 billion from $1.3 billion last year due to the absence of asset sale gains from the prior year, which offset improved margins.

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